Natural Gas ETFs Soar on Inventory Data

Yesterday, natural gas showed a huge run-up in its prices, surging 3% in a single trading session. This stellar performance was primarily driven by healthy inventory data reported by the Energy Information Administration (EIA).

According to the EIA, natural gas in storage dropped 145 billion cubic feet last week to 1.938 trillion, the lowest level since May 13, 2011. While this number is 18.5% below the year-ago level, it is still 11% above the five-year average.

The fund takes short positions in the near-term futures contracts and long positions in the mid-term futures contracts. As mid-term futures contracts are priced higher than the near-term futures contracts, the fund capitalizes on the price differences due to an upward sloping futures curve.

The second winner in the space was iPath Dow Jones-UBS Natural Gas ETN (GAZ) which added 4.89% yesterday. The fund tracks the Dow Jones-UBS Natural Gas Total Return Sub-Index and delivers returns through an unleveraged investment in the futures contracts on physical commodities comprising the index plus the rate of interest on specified T-Bills. (Though we should note it is currently seeing a big premium over NAV and thus may not be suitable for all investors)

Apart from these two, the ultra-popular United States Natural Gas Fund (UNG) also experienced price increases, adding 3.85% in a single trading day.

This product looks to track the changes in the percentage terms of the price of natural gas futures contracts that are traded on NYMEX that is the near month to expire, less UNG’s expenses, except when the near month is within two weeks of expiration. In that case, the next month’s contract will be used instead.

These ETFs are also performing well since the beginning of this year thanks to the increased gas usage for heating in winter. Further, the forecast for low temperatures to continue across most parts of the U.S. will boost prices at least through the end of March (read: The Comprehensive Guide to Natural Gas ETFs).

On a year-to-date look, GASZ and GAZ have returned 2.74% and 3.72%, respectively, and amassed $11.9 million and $41.7 million, respectively, in their asset bases. UNG had easily beaten its counterparts though, and is leading the natural gas sector with an 11.32% gain. The fund has an impressive AUM of over $1 billion and is also the most widely traded (see more in the Zacks ETF Center).